Stephens has plenty to celebrate. Since taking over as president of the family-owned Academy of Art University more than two decades ago, she’s transformed the 86-year-old for-profit institution from a regional operation into America’s largest private art university. Under her watch enrollment has skyrocketed from 2,200 to 16,000, generating an estimated $300 million in annual revenues, heavily subsidized by federal student loans. The Stephens family has turned that pile of art-school tuition into one of the largest real estate empires in San Francisco, with more than 40 properties in prime areas, including a historic former cannery on Fisherman’s Wharf and a 138,000-square-foot office building steps from City Hall. In all, the real estate is worth an estimated $420 million, net of debt, and the family pulls in tens of millions of dollars each year leasing these buildings back to the Academy of Art for classrooms and dorms....

But behind the shiny façade is a less than lustrous business: luring starry-eyed art students into taking on massive amounts of debt based on the “revolutionary principle” (Stephens’ phrase) that anyone can make a career as a professional artist. No observable talent is required to gain admission to AAU. The school will accept anyone who has a high school diploma and is willing to pay the $22,000 annual tuition (excluding room and board), no art portfolio required. It would be easy to accuse AAU of being a diploma mill, except the school doesn’t manufacture many diplomas. Just 32% of full-time students graduate in six years, versus 59% for colleges nationally, and that rate drops to 6% for online-only students and 3% for part-time students. (Selective art schools like the Rhode Island School of Design and Parsons graduate 90% of their students; see “Why Art School Can Be A Smart Career Move.”) The few AAU students who manage to collect a degree are often left to their own devices in finding employment in a related field. In marketing itself to dreamy prospects, the school touts its success at placing students at Pixar, Apple and Electronic Arts. But the morning shift at the local Starbucks is just as likely for some students. That and a mountain of debt. In the 2013-14 academic year 55% of the school’s roughly 10,700 undergraduates had federal student loans totaling $45 million.

Slowly, the illusion is starting to unravel. Enrollment is down 2,000 from its peak in 2011. Estimated profit margins have shrunk from double digits a decade ago to likely single digits; Stephens says the university is profitable but won’t name a figure. The school faces serious code violations on three-quarters of its buildings (see “The For-Profit University That Flouts San Francisco’s Land-Use Laws”). Its abysmal graduation rates have recently drawn scrutiny from its accreditor. Many of AAU’s programs risk losing federal aid eligibility, after tough new regulations governing for-profit colleges went into effect in July. And the school is fighting a whistle-blower suit by former recruiters who say they were paid more, illegally, if they enrolled more students....

The feds aren’t the only ones taking a hard look at AAU. A review team from the school’s accreditor, the Western Association of Schools and Colleges, concluded last year that AAU’s low graduation rates “may indicate that students are not aware of or are not realistic about what it will take to be successful. … This is an expensive proposition when these same students are unsuccessful.” Despite its anemic graduation rates, AAU keeps an entire semester’s tuition if a student is enrolled for at least four weeks, as is typical for art schools. Although WASC reaffirmed AAU’s accreditation for another seven years in July 2014, it issued a “formal notice of concern,” largely because of the low graduation rate, and scheduled a special visit for 2016 to review the school’s progress.